The Intelligent Asset Allocator:
How to Build Your Portfolio to Maximize Return and Minimize Risk

Author: William Bernstein
Publisher: McGraw Hill, 2001

Comments:

“I would say that it is from time to time the duty of the serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself.”

John Maynard Keynes

Synopsis:

The portfolio’s the thing; more than its constituent parts.

Finding the “best” allocation is not the goal, rather finding one that will do reasonably well under a wide range of circumstances.

The most aggressive investor may wish to hold perhaps 25% bonds. The most conservative investor should still hold 7-12% in stocks.

Sticking to the policy asset allocation through thick and thin is more important than picking the right allocation.

Rebalancing discipline is the only consistently effective method of market timing. Annual re-balancing is satisfactory; even less frequent in taxable accounts.

You cannot underestimate the amount of discipline and patience required for this process (rebalancing to target allocations), because it means doing exactly the opposite of what most of the investment world, almost all of whom are professionals and experts, is doing.

Never re-set your policy allocation in response to economic or political events.

Research concluded that the reward of international investing was not increased return but decreased risk.

The correlation of below-average returns in bear markets is higher than above-average returns in bull markets. Thus, the benefit of diversification is often lost in severe bear markets.

Research in 1993 by Thaler & Benzarti concluded that the risk horizon of the average investor was one year. The focus on losing 30% in one year is felt more sharply than failing to meet long term financial goals. The former is easily observed; the latter is not, particularly if you have not established long term financial goals in the first place.